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Wells Fargo lowers financial targets, cuts energy loan exposure

Wed, May 25, 2016 - 7:33 AM

Wells Fargo & Co lowered two key financial targets on Tuesday and said it was sharply cutting exposure to troubled energy loans, signaling that tough times for bank profits may continue through the rest of the year.

PHOTO: BLOOMBERG

[NEW YORK] Wells Fargo & Co lowered two key financial targets on Tuesday and said it was sharply cutting exposure to troubled energy loans, signaling that tough times for bank profits may continue through the rest of the year.

Low interest rates, higher capital requirements and increasing credit costs are weighing on Wells Fargo's results, prodding the San Francisco-based lender to reduce its targets for returns on assets and on shareholder equity.

In a presentation pegged to its biennial investor day event, Wells said it was targeting a return on assets of 1.1 per cent to 1.4 per cent this year, down from the 1.3 to 1.6 per cent it detailed at its investor day in 2014. The bank's full-year return-on-equity target was now 11 per cent to 14 per cent, down from 12 per cent to 15 per cent.

Analysts said they were expecting the news, given the difficulties banks face in terms of interest rates, markets and regulations.

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Since Wells Fargo's 2014 guidance, it has taken steps to prepare for lower interest rates for a longer period of time. As a result, the bank said it would benefit less if interest rates suddenly jolt upward. Federal Reserve officials recently signaled that the US central bank could be on track to raise interest rates in June or July.

Wells said it now expected its net interest margin would rise five to 15 basis points if the yield curve shifted upward by 100 basis points. Its prior expectation was for a net interest margin benefit of 10 to 30 basis points from such a move. A basis point is one hundredth of one per cent.

Energy loans have been a sore spot for banks in recent quarters due to the long-running oil price rout that put many borrowers in dire financial straits. Wells Fargo was particularly aggressive in lending to energy companies when the sector was booming, and it was now taking steps to reduce its exposure.

Wells Fargo's finance chief, John Shrewsberry, said the bank was more than halfway through a reassessment of loans to energy companies involved in exploration and production, and has cut credit lines for 68 per cent of those it has reviewed.

In its presentation, Wells said it expected "continued stress" in its book of oil and gas loans throughout 2016.

"More credit losses will be realised and there is the potential for additional reserve builds," the bank added.